The electric car industry is fascinating. New entry into the auto market can be achieved with the right amount of technological know-how, while growth opportunities expand continuously due to an increasingly environmentally aware customer base. In the rapidly changing car industry, Tesla Motors Inc. (TSLA, Financial) surely has the upper hand in terms of electric vehicles, despite competition from giants such as Ford Motor Co. (F, Financial) or General Motors Co. (GM, Financial). Yet is Tesla still a viable investment option or has the time for entry long passed?
Stock Prices Tell an Interesting Yale
Tesla’s stock price has increased dramatically throughout 2013, up from around $35 per share in early January, to its current value of about $138 per share. This enormous spike in share value of over 390 percent, is surely representative of Tesla’s future prospects, yet it also means trouble for investors. As speculation has led to heavy investment in the electric car firm, those interested in purchasing a stake in the company will be disappointed in the near to medium term.
Despite its hefty price tag, innovative technology and fresh business model, Tesla is not performing as well as many had hoped. Especially when considering its current share value, the firm’s projected returns on invested capital take on negative numbers. Over the years, the company has not only been accumulating debt, but has seen losses increase significantly. Despite the growing revenue stream, supported by solid S Model sales, Tesla has to make up for lost ground, while staying ahead of the competition in terms of innovation. And, with operating margins in the deep negatives, the firm has only been able to generate funding for new projects largely thanks to investors’ euphoria regarding electric car development.
In the long term, Tesla looks like a great investment. Its substantial share of the electric car market has the potential to generate huge profits, yet this industry sector is still rather small. Although the company was excited due to the increased sales volume, only 5,500 Model S vehicles were sold in the third quarter of 2013.
Compared to rivals Ford and General Motors, Tesla does not seems like a potential rival for consolidated car manufacturers. Also, as competitors seem to have noticed this market niche’s growth potential, development of new electric models is already underway. Unlike Tesla, large automakers operate with larger margins and economies of scale, which could enable large-scale production of electric vehicles in the near future.
Obstacles Ahead
Low market penetration, supply chain problems and very high research and development costs are all factors to consider when looking at Tesla. Unlike its competitors, the electric car company must rely on single source suppliers for most of its components, due to their unique designs and functions. Also, the shortage of lithium-ion batteries has limited expansion significantly. Due to a lack of battery supply, Tesla has had a hard time meeting demand for its Model S, and will likely continue suffering from this issue once its new Model X is released. In addition to supply chain problems, the firm faces a huge obstacle: the creation of a network of charger stations for its vehicles. Until the gaps in coverage are covered and the network is expanded, mass production will remain a distant dream.
Apart from being a loss-reporting firm for the past years, and having to deal with several obstacles before it can fully take off, Tesla is highly overpriced. My bearish feeling regarding this stock is also supported by Steven Cohen’s decision to reduce his stake in the firm by half. And, it seems like a logical choice, considering share prices should fall, as Tesla continues to fail in terms of generating profit. Hence, unless you are willing to make a very high-risk long-term commitment, this stock is definitely not worth buying into at this point.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
Stock Prices Tell an Interesting Yale
Tesla’s stock price has increased dramatically throughout 2013, up from around $35 per share in early January, to its current value of about $138 per share. This enormous spike in share value of over 390 percent, is surely representative of Tesla’s future prospects, yet it also means trouble for investors. As speculation has led to heavy investment in the electric car firm, those interested in purchasing a stake in the company will be disappointed in the near to medium term.
Despite its hefty price tag, innovative technology and fresh business model, Tesla is not performing as well as many had hoped. Especially when considering its current share value, the firm’s projected returns on invested capital take on negative numbers. Over the years, the company has not only been accumulating debt, but has seen losses increase significantly. Despite the growing revenue stream, supported by solid S Model sales, Tesla has to make up for lost ground, while staying ahead of the competition in terms of innovation. And, with operating margins in the deep negatives, the firm has only been able to generate funding for new projects largely thanks to investors’ euphoria regarding electric car development.
In the long term, Tesla looks like a great investment. Its substantial share of the electric car market has the potential to generate huge profits, yet this industry sector is still rather small. Although the company was excited due to the increased sales volume, only 5,500 Model S vehicles were sold in the third quarter of 2013.
Compared to rivals Ford and General Motors, Tesla does not seems like a potential rival for consolidated car manufacturers. Also, as competitors seem to have noticed this market niche’s growth potential, development of new electric models is already underway. Unlike Tesla, large automakers operate with larger margins and economies of scale, which could enable large-scale production of electric vehicles in the near future.
Obstacles Ahead
Low market penetration, supply chain problems and very high research and development costs are all factors to consider when looking at Tesla. Unlike its competitors, the electric car company must rely on single source suppliers for most of its components, due to their unique designs and functions. Also, the shortage of lithium-ion batteries has limited expansion significantly. Due to a lack of battery supply, Tesla has had a hard time meeting demand for its Model S, and will likely continue suffering from this issue once its new Model X is released. In addition to supply chain problems, the firm faces a huge obstacle: the creation of a network of charger stations for its vehicles. Until the gaps in coverage are covered and the network is expanded, mass production will remain a distant dream.
Apart from being a loss-reporting firm for the past years, and having to deal with several obstacles before it can fully take off, Tesla is highly overpriced. My bearish feeling regarding this stock is also supported by Steven Cohen’s decision to reduce his stake in the firm by half. And, it seems like a logical choice, considering share prices should fall, as Tesla continues to fail in terms of generating profit. Hence, unless you are willing to make a very high-risk long-term commitment, this stock is definitely not worth buying into at this point.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
